Of course, the most popular option is a 401(k) plan that enables employees to contribute – and employers to contribute or match – a portion of their wages to individual accounts. The only drawback is that these plans typically have annual compliance requirements and certain contribution limits.
Let’s take a look at the safe harbor provision that applies to these plans and how it affects employees.
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Safe harbor 401(k)s are a type of plan that avoids most annual compliance tests, as well as the fees and time it takes to complete these tests. For employees, safe harbor plans also ensure that everyone – including highly compensated employees – can make maximum contributions and 100% of all contributions are immediately vested.
Typically, there are three types of safe harbor 401(k) plans:
The Setting Every Community Up for Retirement Enhancement Act, commonly known as the SECURE Act, eliminated the notice requirement for non-elective safe harbor plans, and employers are allowed to switch to a safe harbor 401(k) plan with non-elective contributions prior to 30 days before the end of the plan year.
To learn more on how the SECURE Act could affect your retirement planning, check out this article.
The most important benefits include:
The most important drawbacks include:
Note: The fact that 100% of employer contributions are immediately vested could be seen as a positive for employees since it provides them with more flexibility.
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